Google: Don't Hate the Player - Hate the Game

I'm an entrepreneur at heart, and I like when my little business ventures and investing happen to coincide. Running a business using products by eBay (NASDAQ:EBAY), Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) allows me to have some additional insight into the actual usage, and application of their tools.

I defended and then berated eBay, who has, through its own actions, distanced, scattered, or simply banned a growing number of important sellers.

I have written good things about Amazon.com multiple times – its Fulfillment, by Amazon service allows small, medium, and large merchants to enjoy Amazon's world-class supply chain at a (somewhat) reasonable cost.

Now it's Google's term to get an in-depth, er, superficial analysis based on my experiences with Google's tools.

I've been using Gmail since before it was cool; run Adsense on multiple sites; use Firefox with a Google toolbar; post on Blogspot (which is owned by Google); have used G's free "analytics" service before and have watched too many YouTube videos. I have also listed items on Google Base (a sort of online marketplace that they havebeen trying to promote); have accepted and paid through Google Checkout; and lastly, have advertised using Google Adwords. I'll be dwelling on the last service.

Google Adwords is the half of its advertising enterprises that serves merchants. By now, most heavy internet users probably are somewhat familiar with Adwords. (If you didn't know, it's those advertisement boxes containing links strewn all over this and other, websites). Everyone from lowly cottage-industry merchants like myself to Fortune 500 companies uses Adwords - everyone seems drawn by the promise of ten-cent clicks leading to unfathomable sales.

In my experiences thus far, I haven't been able to discern that Adwords is very effective, at least for my business (Whacks Wax). I earned allotments of Adwords credits as I've signed up and renewed hosting contracts over the past five years, and I'd use them as they trickled in. Clicks on keywords that aren't too sought after, like "hot ski wax," which are inexpensive, so I set up some programs and let them run.

Maybe it was a result of my lackluster website or undesirable product, but very few clicks ever resulted in sales. Sales only came flowing in after I spiffed up my metatags and did some other SEO tricks, earning my website a spot on the first page of Yahoo and Google searches for many keywords. The organic traffic was much, much more effective than the purchased hits.

I just set up CanadasCoffee.com as a means of distributing Tim Horton's, the world's most delicious (but hard to find) coffee. Once again, I have $50 of Adwords credits to play around with; I hoped some free advertising could jump-start sales.

However, the impact of my advertising buck has been whittled away as Google's algorithms keep making my clicks more expensive. The first day, all search terms (from "Tim Horton's" to the more obscure "buy tim hortons coffee" featured minimum bids of ten cents. Some terms had some other advertising competition, but not very many people were competing for most of the terms.

However, the cost of many terms has inexplicably increased in the two days since then. "Tim Hortons" is now requiring a bid of 40 cents per click, even though there are currently no advertisements shown when the term is searched.

My assumption (which may be incorrect) is that Google identifies when advertisers start advertising, and it will then increase the cost, as there is an increasing demand for the term, (even if only a single advertiser is using it). That way, it can encourage less-searched terms to be paid for cheaply while slowly milking all it can from the more desirable, although uncompetitive, terms.

This strategy is good for Google - in the last quarter, they beat estimates and expectations because they managed to earn more per click. However, it's bad for merchants, who are looking to use Adwords to generate sales as margins and demand are squeezed in a tough macroeconomic environment.

However, unlike my nasty experiences with eBay, I'll admit that what's bad for me isn't bad for Google at all. Many people and companies believe in the effectiveness of Adwords, and there really aren't many alternatives for little businesses with advertising budgets in the hundreds of dollars. Adwords has now expanded into print advertising (and radio and TV advertising), and it helps advertisers find space in major newspapers for huge discounts (I put an ad for Whacks in the major Salt Lake City paper last winter for like $10, thanks to Google).

As Google's search dominance continues to grow, and as Gmail continues to become the world's premier free email service, the revenues from advertising should continue to grow. Monetizing international markets, especially China, will be essential for Google's onward success. Google spent billions for YouTube, but they still haven't been able to figure out how to make money from it; luckily, the cash from their other operations makes the lack of monetization less of a problem for GOOG then it would be for another company. If Google can manage to start making money from these non-core businesses, their furious growth should continue.

Google's earnings are due out on Friday, and clarity into how revenues hold up during tough economic times will be seen at that time. On the one hand, Adwords is a cheap way to advertise, compared to purchasing hundred- or thousand-dollar advertisements in newspapers or on TV. However, there's a chance that the coupling of thriftiness from big companies - like mortgage lenders - or abandonment by many small advertisers (like myself) may pressure growth. I have no prediction to offer.

However, as I listed all of the Google services I use, it became clear that Google has built an unrivaled internet kingdom. Its most popular services - Gmail, YouTube, Adsense and Adwords, and of course, the search engine - are the best that the Web has to offer, and they draw users in with little coercing. It's less-popular offerings, like Base and Checkout, are being bankrolled by Google's vaults in an effort to buy market share.

Therefore, in the end, my thriftiness may be indicative of one fact about Google - the company makes a ton of money. Don't hate the player - hate the game.